Estate and Gift Tax Changes from Tax Reform – Sweet as Honey

Tax Reform has made a significant impact on estate planning—and the changes are as sweet as honey. The most buzz-worthy, amongst the swarm of differences, is the increase in the lifetime exemption amount, which doubled under Tax Reform.

Something to Hum About

Under previous law, the lifetime exemption was $5 million adjusted for inflation, meaning in 2017, the exemption amount for gift, estate, and generation-skipping was $5,490,000. Now, in 2018 under Tax Reform, that exemption has doubled to $11.2 million for individuals and $22.4 million for married couples.

However, this is NOT a permanent change, as this exemption will revert to $5 million adjusted for inflation when changes under Tax Reform sunset in the year 2026.

Note: Outside of Tax Reform, another area affecting gifts for 2018 is the change to the inflation-adjusted amount for annual exclusion gifts. In 2018, the new annual exclusion increased by $1,000—from $14,000 to $15,000.

Items to Comb Through

The impact of these changes can be different for everyone and provide a variety of different planning opportunities. Here are four essential items to comb through with your CPA or estate planning attorney.

1. Step-up in Cost Basis.

Tax Reform retains the step-up in basis for all assets included in the estate of a deceased person. The tax rate also remains the same at 40%.

2. Planning if Estate is Over $22.4 million.

Much of our usual advice regarding current planning is still on point, including making gifts early plus using techniques that include family partnerships, defective grantor trusts, and charitable planning. The ability to make current gifts and also remove the appreciation over time from your estate could mean considerable savings. Remember, there is still a sunset provision, so planning should commence as soon as possible to take advantage of these exemptions that terminate for deaths beginning in 2026.

Note: Clients with more than $22.4 million in assets will generally benefit from a customized approach—contact CRI for assistance.

3. Portability of Exemption.

If your joint assets are more than $11.2 million and the first spouse dies with no assets (or assets much less than the $11.2 million), then there is still the ability to make the exemption portable between spouses.

Items to Know:

This election must be made on a timely filed estate tax return, Form 706.

The election allows the estate of the predeceased spouse who had fewer assets to move their remaining exemption to the surviving spouse who can then use this exemption to shelter assets still in his/her name.

The generation-skipping transfer (GST) exemption is not portable.

Using “portability” may not be effective in many states that still have an estate tax, or for transferring the assets to lower generations. Therefore, more customized planning may be necessary.

EXAMPLE: The first spouse dies having assets valued at $6 million. The individual’s exemption in 2018 is $11.2 million. Therefore, the remaining $5.2 million can be “ported” over to the surviving spouse to be used later.

Note: There can be complications if the surviving spouse remarries, so please contact a CPA or attorney to discuss these issues.

4. Increased Exemption.

Most wills/trusts take advantage of the “credit exemption amount” or “credit shelter amount.” Maximizing the credit amount, though good planning, may not benefit the surviving spouse and pass either outright or in trust for the children. This planning is commonly used but may have been completed in earlier years when the exemption was less than $5 million. Since the exemption is now $11.2 million, a surviving spouse may not have sufficient access to the first $11.2 million of assets.

A possible fix is to make the surviving spouse a beneficiary of the trust. Remember that making this individual a beneficiary and/or trustee could have its own issues and should be discussed with your attorney.

Protect the Hive

You’ve worked hard to build your hive; don’t “bumble” it with poor planning. Contact CRI’s estate and gift tax professionals to review your current plan and how these changes affect you. Our worker bees are ready to assist you with a customized planning strategy to maximize your honey supply.